Life Insurance - Available Coverage
Printer friendly version
It is often most effective to use policy contracts which have
both of the following features:
- guaranteed renewability; and
- fully guaranteed renewal premiums.
In addition it is often best to assure that any life insurance
coverage purchased will be in full force and effect for at least
the expected duration of your life.
A term insurance policy provides for a specified amount to be
paid on the death of the insured. Premiums charged under most
term insurance policies increase as the insured ages because,
as time goes by, the probability of the insured dying during
the term of the contract increases. The increasing premium is
merely a function of the increased likelihood of the insurer
having to pay the claim.
Some term insurance contracts may provide for an experience rated
refund. This is basically a rebate of premiums already paid when
the actual mortality experience of the pool of lives insured
by the insurer is more favourable than that contemplated at the
time premiums for the contract were determined.
Guaranteed renewable term and guaranteed convertible term are
variations on the basic term insurance contract. Under a renewable
contract, the insurer is obligated to renew the contract each
year until the contract period has expired. Both the renewal
of the contract and the renewal premium are guaranteed. This
is contained as the only premium in the contract.
Convertible policies allow the policyholder to elect at any time,
while the policy is in force, subject to a maximum conversion
age, to convert the contract to a 'superior' contract of insurance
then issued by the same insurer. (Superior contracts are essentially
those with longer periods of indemnity, or with cash values,
or with increased cash values, or with higher premiums.)
WHOLE LIFE (and Term to Age 100):
Whole Life and Term to age 100 insurance policies are more traditional
forms of insurance coverage and is often referred to as "permanent
Under Term to age 100 contracts premiums remain constant over
the term of the policy and may, in some cases be considered as
"paid up", by the insurer, after a fixed number of
years (often 20 years). Most "paid up" term to age
100 contracts will contain provisions for either a refund of
premiums paid or a cash surrender value after the policy has
been "paid up".
A whole life policy can be regarded as an escrow account established
by an individual where the insurance company agrees to insure
the difference between the capital accumulated under the contract
and the ultimate amount specified by the policyholder in the
event that the insured dies before the goal is reached. Premiums
remain constant over the term of the policy and consists of an
equity component and an insurance component. The insurance component
pays the insurance company for assuming the risk under the policy
which, at any point in time, is the difference between the escrow
target amount and the amount of equity in the contract.
The balance of the premium is the reserve component and increases
the equity value of the policy, thus reducing the financial exposure
of the insurance company as it increases. As time passes, the
probability of the insured dying increases which by itself would
result in a higher premium. This is offset by the reduced financial
exposure of the insurance company as the equity accumulates in
the policy. This permits the insurer to charge a level premium
throughout the premium payment period specified in the insurance
The cash accumulations in the policy (savings plus interest)
build up the cash surrender value of a policy and can be used
to fund policy loans or surrenders and these funds may then be
used to fund a living buy out.
A universal life insurance policy has no fixed premium and no
fixed policy reserve. Subject to certain minimum requirements
the policyholder is able to determine the amount and frequency
of premium payments over the life of the contract. The policy
may be for a specified face amount or for a specified amount
of death benefit plus cash reserves. Any cash value will equal
the net premium ( the amount paid less mortality costs, sales
and administrative charges ) at the beginning of any policy year.
Monthly increases in the cash value are credited for interest
at current rates ( options from daily interest to five and even
10 year rates are now available ), and monthly deductions are
made for mortality risk charges.
To maintain the policy in-force the owner must deposit enough
premium to create reserves at least equal to the current month's
risk charge. In order to avoid loss of status as an "exempt
life insurance policy" (one which is exempt from annual
or triennial reporting of interest for income tax purposes),
a minimum amount of insurance must be maintained, and this, together
with the cash value of the policy contract will be the amount
paid on the death of the life insured. (some universal life contracts
pay only the face amount at death, reducing the risk to the insurer
by using the cash value of the contract as a partial 'self insurance'.
Once again the nature of the contract should be investigated
prior to purchase.
Universal life policies form the basis of most 'full cost recovery'
insurance programmes. Under these programmes the insurer undertakes
to reimburse for the full amount of premiums paid, and the stated
death benefit at the death of the insured:
Universal life policies provide a measure of flexibility which
allows a policyholder to vary the ratio of insurance and accumulation
at almost any time to adjust to economic, lifestyle, and other
changes occurring during the lifetime of the insured. The premiums
may be altered to increase or decrease the percentage of premium
dedicated to insurance protection. Premium payments may be missed
where circumstances change, and cash withdrawals are possible
where reserves are sufficient. Policies of this type may also
be prepaid at any time, and after mortality costs have been set
aside premiums may be permanently discontinued.
POINTS OF INTEREST:
- In times of high inflation and high interest
rates a more flexible plan with a variable return is recommended;
- In times of low inflation and low interest
rates a traditional whole life plan may produce a greater return
and a lower net cost;
- All proposals for universal life policies
are not created equal. Each company prepares quotations with
different interest rate assumptions (which are neither projections
nor guarantees) and the merits of each may be distorted by the
insurer's assumptions. When comparisons assume only those rates
and charges which are fully guaranteed by the insurer a more
accurate comparison will generally be the result;
- Many renewable term contracts have two,
different, renewal premiums. One rate which is guaranteed, and
the second, which is normally called select or preferred which
is not guaranteed. Fully guaranteed contracts provide greater
- Convertible term plans from different
insurers have different definitions of "convertible".
Many companies have internal conversion rules which restrict
conversion options. Some insurers allow conversion to one or
two specific plans. In general, the larger the insurer the more
liberal their conversion regulations.